If you’re in the market for a new vehicle, you may wonder if buying new or used is a better deal. The general rule of thumb is that used cars are cheaper. However, as the price of used cars increased by more than 6 percent in 2022, the numbers may not be so straightforward.
Before you make a decision, calculate the following costs and determine which type of car would work best for you.
Taxes and Fees
Car ownership comes with a lot of fees. Most states require owners to register their cars and pay taxes. States like Michigan, Minnesota, and New Jersey charge a higher registration rate for new cars. Other states base the registration fee and excise tax rate on a vehicle’s value. This can also make a new car more expensive.
Car insurance rates also vary based on a vehicle’s make and model. Insurers take into account the cost of repair and the car’s value to set a quote. If you are financing your new car, the dealer may require additional policies, which will increase your costs. You can look up car insurance tips to reduce your premiums, but overall, a newer car will cost more to insure.
On the other hand, Congress has made buying fuel-efficient vehicles more economical by offering a $7,500 tax credit for new purchases made after 2010. If you were considering a new car, you could go for a fuel-efficient hybrid or electric and take advantage of the tax incentive.
Fuel Economy
Gas prices are an important factor for calculating the long-term cost of vehicle ownership. Due to advances in car technology, most new cars have better fuel efficiency than older models. This can add up to thousands of dollars in fuel costs.
If gas costs $3.00 a gallon, a 2010 model that consumes 40 miles per gallon will cost $375 to drive 5,000 miles per year. However, the 2022 version of the same car with an 80-mile per gallon consumption rate could cover the same amount of miles at half the cost.
Even fuel-efficient models consume more gas over time. Engine components wear out over time and lead to reduced efficiency.
Maintenance
Perhaps the biggest cost factor between new and used cars is maintenance. New cars often come with a factory warranty. This greatly reduces the maintenance costs you must cover for the first few years of ownership. Most used cars are sold as-is, which means you are solely responsible for covering any future maintenance costs.
Older cars with high mileage are also more likely to require expensive replacement parts, such as new suspension or transmission. In some cases, repair costs can exceed the price of the car. Dealing with an unreliable car also has hidden costs, such as lost pay from missed work days or the cost of towing.
Despite this, there are certain makes and models that have low maintenance costs, even after five or 10 years on the road. Ford Focus, Toyota Prius, and Lexus ES are all noted for low ongoing repair costs.
Depreciation Rates
Depreciation refers to the difference between the price paid for a car and what it can be sold for. New cars have very high depreciation rates. On average, new cars lose between 10 to 20 percent of their value within the first year. A brand-new car could sell for nearly half of its purchase price after five years.
Depreciation can make financing a new car very tricky. For example, if you take out an 8-year car loan, your vehicle could be worth only 60 percent of its purchase value before your term is up. This means that even if you sell your car, you would still owe a balance on the loan.
You can avoid the steepest depreciation rates if you buy a car that is at least five years old. However, as most cars of this age are out of warranty and may require repairs, you will have to crunch some numbers to determine the best deal for you.
Out-of-Pocket Costs
Car ownership also comes with countless out-of-pocket costs that you may not remember to factor into your budget. For example, since newer cars can be an attractive target for thieves, many people opt to park their vehicles in private lots. This can add several hundred dollars a month to your running costs.
Dings and scratches also stand out more on brand-new vehicles and can tank their resale value. If you opt for a new car, you will also have to spend more on detailing and car washes.
